Performance of MSCI Japan index over 1-yr
Source: Financial Express Analytics
The Japanese economy has been less effected by the recent financial crisis when compared to the US and Europe. However, the market's focus has unfortunately been on the Japanese yen and some positive developments have been overlooked.
However, we no longer see a reason to sell Japanese stocks on the basis of excessive yen strengthening. Next, the series of first half earnings announcements has generally been positive, in spite of the impact of the strong yen.
There were also some bright spots in consumer spending during October, including sectors other than home electrical appliances, where the "Eco-Point" system and record hot summer buoyed sales. And also, an increasing number of firms are implementing stock buybacks due to factors including the downturn in share prices and the Japanese stock market is regaining momentum.
Japanese companies have made continuous efforts to reduce US dollar exposure. The US dollar is used less as a settlement currency and its effects have declined over the past couple of decades.
Export levels to the US which in the 1980s were over 40 per cent were barely 15 per cent in 2009.Growth is coming from companies expanding into Asia and selling products in the country where they were produced in (such as Asia/China).
This also offsets the currency risk. A strong yen also means they can import raw materials and energy resources at a lower cost. According to the Ministry of Finance, 71.7 per cent of total imports are settled in US dollars. Giving Japanese corporations an advantage to trade in the stronger currency.
Therefore, although the political environment and the strength of the yen are discouraging some international investors from increasing their Japanese exposure, we believe that there are many companies in Japan likely to show good growth in earnings. The truth is Japanese companies are far less influenced by a strong yen than the market perceives to be the case.
For instance, Japanese companies are renowned for innovation and their products' global competitiveness have strong growth prospects in today's recovering global economy. Two companies to highlight are Murata Manufacturing and NIDEC which are at the forefront of smart phone and cloud computing technology.
Murata handles a wide range of electronic components including high-end ceramic capacitors used in the latest smart phones, which are in great demand. NIDEC is a precision motor manufacturer with the top global share in hard disk drives and brushless motors.
Both have the competitive edge with regards to these products but have been mispriced by the market, which has failed to recognise the growth in demand for their technology. A rise in data communication volumes will fuel demand for Murata's smart phone technology and demand for NIDEC's energy-saving brushless motors will come from Japan and the US.
We expect 2011 to present buying opportunities for Japanese equities as long as the yen continues to remain at current levels.
Shigeru Oshita is a fund manager at Chuo Mitsui Asset Trust and Banking. The views expressed here are his own.